Iran Conflict Sell-Off Rattles Tech Stocks

16:25Ed Ludlow:And that's why, in many ways, NVIDIA and Jensen didn't include any China business in their forward-looking guidance. So do we just take it from here that China doesn't want even HG100 and where we are in terms of a potentially crafted Blackwell offering?

16:38Jim Anderson:Yeah, I mean, the way that NVIDIA's leadership have phrased it is like, look, you'll know the Chinese have given us permission when you see the Chinese companies make orders. We haven't seen them make the big orders yet. So obviously that doesn't look positive. It doesn't look hopeful for the way things are progressing.

16:53Caroline Hyde:Going back to the basics of what Caroline just said, the forecast for sales is$78 billion plus or minus 2 % in the quarter. It does not include any China. but when you did your earnings piece the next day, a lot of the analysts were like, well, China is then therefore potential upside in the event they are allowed to do it. Jensen's modeling for that or not?

17:12Jim Anderson:It doesn't appear to be. I mean, they're being prudent right now. I mean, the potential upside came from the detail that we got during earnings, which is, hey, we got a few licenses. So Wall Street was like, oh, great, crack of light. Here we go. And then now we get this. And obviously we still haven't seen any movement from the China side either.

17:30Ed Ludlow:Now, China used to be a significant area of revenue. What was it? Almost 20 % at one point for NVIDIA numbers or thereabouts. Where's the Middle East at? Can I just ask something to throw a curveball into the mix in the current geopolitical situation?

17:42Jim Anderson:No, that's a very good question. Obviously, NVIDIA cares very much about what's called sovereign AI, which is, you know, countries' attempts to try and build their own infrastructure. We've seen that in Saudi Arabia. We've seen that in the UAE. And these are areas where there's a lot of cash and there's a lot of investment in this future economy being made. So any threat to that would obviously be a threat to this whole system.

18:04Ed Ludlow:Well, certainly NVIDIA is one of the key legs to the downside in a points perspective today. Ian King, we're always so thrilled to have his expertise and it's nice to be sat next to him as well. Meanwhile, let's take a quick look on what's happening with Apple, because if you didn't realize, amid the torrent of news that you're trying to digest today, the company is actually introducing refreshed MacBook Pros and Airs with an M5 chip. The company also raising the prices of those products amid an industry-wide memory crunch. Other products announced include two new external monitors. As you see, shows down 9.10%, so actually better performing than the rest of the market, Ed.

18:43Ed Ludlow:Welcome back to Bloomberg Tech. War in the Middle East. We take a look at what's happening in the markets amid a U.S.-Israeli focus on Iran. We've got the Nasdaq 100 off by 1.6%. Micron leading you on the points perspective of the downside. So, too, it is Nvidia. We're seeing the S &P 500 off by 1.5%. Bitcoin is acting like a risk asset today. We're back lower, but it's still elevated versus where it was on the weekend. 68 ,800 is where we trade. move on to individual names because it is important to see where the impact of tension and ongoing war in the Middle East, where it has and what it does to assets owned by Amazon, for example.

19:18Ed Ludlow:AWS warning of prolonged disruptions to its services after drone strikes damaged three of its data centers in the Middle East. They say the company said drones had directly struck two facilities in the UAE and damaged infrastructure near other facilities in Bahrain. Palantir, The sentiment shift today is so negative that even companies that are meant to benefit from the focus on defense and defense tech are on the lower side. We're up by 1.4 % after a rally yesterday. More analysts are going positive on Palantir, of course, software that's used by the government very much in the defense perspective.

19:49Ed Ludlow:And we're seeing 20 out of 31 analysts now saying buy the stockhead.

19:53Caroline Hyde:Shares of defense firms have joined the market sell-off, even as the conflict in Iran reinforces their critical role, the critical role of the U.S. primes. Let's bring in Bloomberg Intelligence Senior Analyst Wayne Sanders for more. Wayne, you've been keeping the React and the research up to date over the last two or three days. You have this scenario where if this conflict lasts weeks or more, you look at the airstrike capabilities the United States has and who might benefit. We showed some of those names on the screen just there. But give us your latest research, please.

20:25Jim Anderson:Yeah, absolutely. Thank you so much for having me on. When you think about this conflict so far, a lot of the munitions experts, right, you're looking at RTX, you're looking at Lockheed and Northrop, are really the ones that are set really to benefit off of part of this because they're going to have to replenish what they've got. The problem is that as we continue to expend a lot of the munitions right now, especially if you're looking at your AIM-9Xs and your AMRAAMs, which are your aircraft missile shots, as well as your tomahawks that are coming from your naval vessels, which comes from RTX.

21:00Jim Anderson:These are the ones right now that are going to be critical also in further contingencies that we would look down the road 2027 and beyond. So we want to make sure that there's a balance between both, that we are using them effectively now and having the ability to replenish them in the future.

21:14Ed Ludlow:When we turn to you, because not only are we lucky enough to have you as a senior defense research analyst here with us at Bloomberg Intelligence, but your past experience with the Office of the Undersecretary of Defense up until 2024, the fact that you were so ingrained with the Department of the Army as well. Therefore, are we well placed when you're looking out to 2027 and the likes? And in the here and now, are we using the right strategic assets?

21:36Jim Anderson:Yeah, no, great question. And so the bottom line I try to tell a lot of people is the U.S. military does a very good job of making sure that they have contingency plans in place. They war game these all the times to say, OK, these types of conflict scenarios that we would be looking at would require this amount of munitions. It would require these amount of aircraft. It would require these amount of targets that we would want to be able to hit. When you put all those into place, I guarantee you that there is not a way where the president of the United States got a briefing from the Pentagon that says, hey, we're going to run out of missiles in a specific period of time if we were to go into Iran.

22:09Jim Anderson:So they have those contingencies in place. They know what they're doing from that. Given the fact that we have air superiority as well means that we have plenty of resupply capability in the area as well.

22:19Caroline Hyde:So I want to talk about what's happening on the ground. our colleagues at Bloomberg News and at Bloomberg Economics have basically done the missile math. For the United States, this has been focused on the Patriot missile system, right? Four million dollar missiles, whereas Iran has deployed lower cost,$20 ,000 drones. There is evidence that the U.S. is also looking at drone strategy. What are you seeing in the data that's being published?

22:46Jim Anderson:Yeah, we're doing a lot right now. Now, the U.S. is doing a lot, especially on counter-drone technology as part of the Pentagon's Replicator 2.0 initiative. There are a lot of companies out there right now, BAE working on APKWS as well. That's been something that's been used in Ukraine as well from a counter-drone capability. And then you're also, you know, you start looking at things like directed energy, high-powered microwaves, and high-energy lasers. Those are further out, right? They are not right now at the point of full-rate production and scalability. But it starts to ask the question, like you guys are talking about, is you have to be able to look at the magazine depth, how much it costs for us to be able to shoot those things down.

23:27Jim Anderson:And they've got to be alternate technologies that are out there that can help us be able to do that a lot cheaper. You look at it on the munitions side of the house. We reverse-engineered, the United States reverse-engineered a Shahid drone specifically to create the Lucas drone. So from a strike perspective, you're now looking at instead of a$1.5 million Tomahawk missile, you could actually use a$35 ,000 unmanned one-way attack drone, which this is the first operational employment that has been out there during this time in Iran.

23:57Ed Ludlow:Wayne Sanders, a Blue Bay intelligence analyst, as well as retired colonel. We so appreciate your time today. Look, demand for defense tech may be set to rise, but the spike in oil, the gas prices, the closure of key shipping routes. Well, they're raising concerns about how those products reach markets. Tara Murphy-Doski is here with us, CEO of Goveni. Look, it's a software provider for defense tech supply chains. You have the inside track on resilience right now. You sit there in Washington, Tara, and I ask, you put out a note really thinking about an availability crisis that we currently have.

24:31Ed Ludlow:Spell out that reality that we have in acquisition right now. The reality is that I think you can see from the weekend the demand for American military power is continuing to increase. And so much of the conversation, including what we just heard from Wayne's great summary, is focused on production of new systems. That's incredibly important. But when you also look at what the United States is bringing to bear in the Middle East right now, F-15s, F-22s, some of these systems are sustainment challenges as well. And so there's a production need in the United States. There's also an availability of parts and legacy systems that is equally important.

25:18Ed Ludlow:We're not in any sort of real immediate crisis, though, when it comes to this Iranian focus and battle that currently rages. is? We're not. I would say that the United States today is capable, including not just from a military capability perspective, but a capacity perspective of executing any military operation that it deems appropriate. We are not in immediate danger of running out of stockpiles of munitions. We are, when you look at longer-term trends, in a situation where if we are firing one year's worth of missile production in one week time, then things start to really become questionable in terms of overall sustainability.

26:08Caroline Hyde:Tara, one of the most read stories on the Bloomberg is about Russia seeing the war in Iran as putting pressure on its own air defense systems in the context of Ukraine. Very interesting. Earlier in programming, we spoke to SF CFO about how Ukraine fits into the Iran dynamic. Just listen to this.

26:26Jim Anderson:Some of the experience from Ukraine is developed quite quickly into the use. Some of this will take time and the experience is still coming. So I'm expecting now the focus in AI particularly is so massive, as well as all the other technologies, like, for example, 3D printing of the missile, etc., what we can use within the U.S. and European startups.

26:52Caroline Hyde:Exactly the same topics you've been discussing, right? The lessons that should have been learned from Ukraine in predictive preparedness versus, like, in the U.S., military apparatus at least, this cultural just-in-time system, essentially. How do you see that learning from Ukraine and what we're seeing in Iran?

27:13Ed Ludlow:I think you put it perfectly, Ed. I don't think the learning has been absorbed enough. And we know that AI, the era is upon us. And what we need to do as a U.S. military, as a U.S. national security apparatus, is better harness it for U.S. national security aims and overall American interests. Your point about being able to look ahead here is such a good example of where AI can be powerful. You know, we were just talking about the impact of this war with Iran or this military crisis with Iran on the primes. And yet one great example of how Govini uses AI in this context is to demonstrate that when you look past the primes, the sub-tier suppliers of critical parts for those munitions are shared.

28:03Ed Ludlow:And so you end up with these bottlenecks and choke points in the supply chains for military systems that used to be completely invisible to decision makers. That's not true today with what you can do with AI and data. And so the next step is we understand those dynamics. What are we doing about it from a pre-positioning and stockpile management perspective?

28:25Caroline Hyde:Tara Murphy-Darty, CEO of Gmini, thank you very much. So coming up in the program, Coherent CEO Jim Anderson joins us to talk about his company's new strategic partnership with NVIDIA. That includes a$2 billion investment. That's next. This is Bloomberg Tech.

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30:58Caroline Hyde:NVIDIA has agreed to invest$4 billion in the photonics firm's coherent momentum. The two equally sized bets by the AI leader should ensure demand for advanced optical components used in data centers. Let's discuss with coherent CEO Jim Anderson. And I think a reasonable place to start is to understand the role that a laser has in the server design and in the data center more broadly, how servers talk to one another. Because the market reaction is quite clear to how investors feel about this. But where does the technology fit in? Yeah, that's a good question. First of all, thank you for having me on.

31:32Caroline Hyde:I appreciate it. Yeah, the way you can think about it is a laser is really ultimately it's photonics. Right. It's really about light. And it's about using light to transmit data in the data center. And there's a good portion of the data center already today where all of the communication of the data is happening with light. And the reason that light gets used, rather than, for instance, an electrical signal, is light is the absolute fastest, most power-efficient way to transmit data. And so a good portion of the data center already runs 100 % on photonics, optical connections. But as we move forward, building new data centers, as we see a massive ramp in the amount of data flowing through these data centers, more and more of the data center connections will be based on light, on optical photonics.

32:20Caroline Hyde:So in this arrangement, you'll take the funds for R &D purposes. But inside of it, there is a purchase opportunity for NVIDIA. NVIDIA has done a lot on silicon photonics. They've told me about it for quite a while now. What's new in it for them? What is it that they're able to now do that they couldn't do themselves? Well, they're relying on us to bring the photonics expertise, right? So NVIDIA for us has been a long-term partner, actually over 20 years as a customer and a partner through their Mellanox acquisition. So we've had a long history with NVIDIA, and really what we're doing is working together to use photonics to advance the architecture of data centers, to find new innovation within data centers.

33:01Caroline Hyde:And the key thing that photonics or optics brings is incredibly power-efficient data transmission. Because, again, there's no more efficient... As opposed to transferring of our electrons. Exactly. So as you increase the data rates, as you increase the amount of data that's being transmitted, you have to, if you're using electrical today, eventually you'll hit a physics limit and you'll be kind of forced to switch to optical. And so we'll see more and more of the connections within the data center move to optical. And that's really where we come in. We're a global expert in photonics and optical communication.

33:35Ed Ludlow:The market is forward-looking. They understood the copper to optical vibe for a few months, if not years, and your shares have shown that. But what's interesting is Lomentum CEO was speaking at an event yesterday, Michael, and he was talking about even with scaling of their supply, they're still way back. They're falling further behind where demand is. Is that something similar for you as well?

33:56Caroline Hyde:Well, demand, there's no doubt, demand is incredibly strong, and that is both in the near term and in the long term. I mean, the forecasts that we're seeing from our customers, not just NVIDIA, but large hyperscalers, cloud service providers, are just exceptionally strong. And so what we are doing about that is we are rapidly expanding our capacity. I mean, we are building capacity as fast as we can.

34:18Ed Ludlow:What does that look like?

34:19Caroline Hyde:What's the supply chain you mean? I was going to say, just as one example, Ed, you asked about the lasers. Let's take the lasers.

34:25Ed Ludlow:We all want to talk about lasers.

34:27Caroline Hyde:So if you look at the lasers, we're doubling our capacity this year, right? So we're coming out with twice as much indium phosphide. That's the key material underneath the lasers. But twice as much indium phosphide production. So we are ramping our capacity as fast as possible. But back to as we see more and more of the data center convert from electrical to optical, you've got kind of two big secular growth trends underneath us. and number one, the data center growth, but number two, this conversion of electrical to optical. And so that just generates an incredible amount of demand. So we're trying to stay ahead of that.

35:02Caroline Hyde:We're ramping capacity. This NVIDIA partnership is part of that. That investment that they made into Coherent will help us ramp capacity faster and make sure that we've got the right capacity. Ramp capacity where? We had the co-founders of Mesh on the show recently, SpaceX alum who did lasers at SpaceX. And they came to market with a very simple argument. output of these systems at scale is done in China. There isn't a facility in the United States. There isn't the capacity here. Is that part of your game plan or you dispute that? Laser, absolutely. Laser's, some of the key technology that we're developing and ramping is here in the U.S., right?

35:41Caroline Hyde:So we have a long history of U.S. manufacturing. We were founded as a U.S. manufacturing company. We've got over 20 manufacturing sites across 13 different states. But one of the key technologies that we're ramping on behalf of NVIDIA and other customers is that laser technology. That's happening in Sherman, Texas, right? And that's a great facility. We've supported customers out of that facility for years. But that's part of where we're going to be doubling capacity.

36:08Ed Ludlow:What do you need from a raw material perspective? What is it that makes U.S. manufacturing ever more capable? I'm sure you're discussing this with the government all the time.

36:15Caroline Hyde:Yeah. So one of the key inputs is it's the indium phosphide substrates themselves. And so we have a very diversified supply chain. We've, just like NVIDIA is securing capacity rights to our capacity, we're doing the same thing with our suppliers. So we're making sure that we've got all the key input capacity or input supply secured. But look, we believe that these key optical technologies like lasers, we absolutely want to see that manufactured in the U.S. Now, we have other sites as well. We're a global company, and so we are ramping at multiple sites. But that's one of our key facilities is Sherman, Texas.

36:55Ed Ludlow:Jim, it's great having you on. And what is a rather busy week, Jim Anderson, Coherent CEO. Always love talking lasers.

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